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Third Party Providers

Third Party Providers

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Published by: bldruser on Nov 01, 2011
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October 2011
Third Party Providers
In June 2009, the Department issued an Industry Advisory entitled “Unlicensed ThirdParty Service Providers.” In that Advisory, the Department expressed concern aboutactivities engaged in by unlicensed providers of certain services to licensees inconnection with the sale of alcoholic beverages, particularly in the context of Internetsales. A number of regulatory issues and concerns were identified. Since the issuance of that Advisory, the Department has received numerous inquiries seeking clarification orfurther guidance in the context of various unlicensed activities and licensee relationshipswith unlicensed service providers. In response, in February 2011, the Director of theDepartment asked stakeholders to present an evaluation of the different types of servicesoffered and to address issues posed by existing laws and regulations. The Departmentwas consulted throughout this process and worked with stakeholders to address the issuespresented.Although the Department remains concerned that certain activities by Third PartyProviders may violate California law, particularly in the areas of sales by a personwithout a license and the exercise of impermissible control of a licensee by a personwithout the privilege of that license (Business and Professions Code section 23300), theDepartment believes that licensees and Third Party Providers can form businessrelationships that facilitate lawful transactions for sales of alcoholic beverages over theInternet. Accordingly, the Department now issues the following advisory guidelines toassist licensees and unlicensed Third Party Providers in complying with California law:
For the purposes of this advisory, the term “Third Party Provider” refers tounlicensed entities that are involved with the promotion, marketing, andfacilitation of sales of alcoholic beverages by licensees over the Internet. Third
October 2011Party Providers are involved in one or more of the steps in the transfer of title of an alcoholic beverage from a licensee to a consumer, such as placement of advertising, making recommendations to consumers, directing consumers tolicensees, receiving orders and passing them on to licensees, processing payments,and assisting with shipping arrangements.
Given that only licensees may engage in activities for which a license isrequired, all sales transactions involving Third Party Providers must ultimatelybe conducted by and under the control of a licensee. This includes decisionsconcerning the selection of alcoholic beverages to advertise or offer for sale,the pricing of those beverages, and the ultimate acceptance and fulfillment of the sales transaction.
A licensee working with a Third Party Provider is ultimately responsible forany activities undertaken by the Third Party Provider on the licensee’s behalf.
Advertisements to sell alcoholic beverages on Internet sites are akin to print,radio and television advertisements, and they only become an integral part of asale when the sale is completed by the transfer of title of an alcoholic beveragefor consideration. The mere placement of an advertisement for an alcoholicbeverage on the Internet by a Third Party Provider at the direction of alicensee, without a transfer of title for consideration, is not a completed salewithin the meaning of Business and Professions Code section 23025.
Orders for alcoholic beverages solicited by licensees utilizing Third PartyProviders must be transmitted by the Third Party Provider to the licenseeinvolved. The licensee responsible for the sale must be clearly identified andmust ultimately control the transaction, including any decisions concerningacceptance or rejection of such orders. Licensees must also be responsible for,and must control, the fulfillment of orders and the shipment of alcoholicbeverages from the licensees’ licensed premises or other authorized shippingpoint (such as a licensed public warehouse).
The control of funds from a transaction involving the sale of alcoholicbeverages constitutes a significant degree of control over a licensed business.As such, while a Third Party Provider may act as an agent for the licensee inthe collection of funds (such as receiving credit card information and securingpayment authorization), the full amount collected must be handled in a mannerthat gives the licensee control over the ultimate distribution of funds. Thismeans that the Third Party Provider cannot independently collect the funds,retain its fee, and pass the balance on to the licensee. The Third Party Providershould pass all funds collected from the consumer to the licensee conductingthe sale, and that licensee should thereafter pay the Third Party Provider for
October 2011services rendered. Alternatively, the parties may utilize an escrow account, orsimilar instrument, that disburses the funds upon the instructions of thelicensee. So, for example, a Third Party Provider may accept consumer creditcard information, debit the card, deposit the funds in an account under thelicensee’s ultimate control, and, upon the licensee’s acceptance of the orderand direction to the account holder, receive a fee from the account. Given thenature of Internet transactions, the Department recognizes that such collection,acceptance, and disbursement of funds will often times be accomplished solelythrough computer-generated means.
Licensees may not give any premium, gift, or free goods, directly or indirectly,in connection with the sale or distribution (including marketing) of alcoholicbeverages, unless expressly authorized by law. (Business and ProfessionsCode section 25600; Title 4, Cal. Code of Regulations, section 106.) Thismeans that a Third Party Provider acting for or on behalf of a licensee cannotengage in such activities in connection with the sale, distribution, or marketingof that licensee’s products. Disclaimers such as “void where prohibited bylaw” or “included with purchase” may not relieve a licensee of liability wherethe consumer is not actually charged for the item offered “free” or theconsumer has no choice but to “purchase” the item offered “free” to non-California consumers. Accordingly, invoices should accurately reflect the cost,or reduction in cost, to the consumer.
Third Party Providers may receive compensation for services provided. Suchcompensation must be reasonable, and any compensation structure utilizedmay not result in any actual or de facto control over the licensed businessoperations, in whole or in part, by the Third Party Provider. In evaluating theintent and impact of any particular compensation structure, the Departmentwill look at the total operations and relationships between the parties todetermine whether a non-licensee is in fact exercising license privileges, orengaging in any activities for which a license is required.
The Department has received specific inquiries concerning the licensing of trademarks and compensation for such licensing arrangements. TheDepartment recognizes that trademarks have value and that a trademark holdermay generally license the use of its trademark and receive compensation forsuch a license. Moreover, the Department also recognizes that a trademark holder has an interest in insuring that products sold under the authority of thelicensed trademark meet standards of quality established by the trademark holder. As with compensation structures, the Department will look to thetotality of the trademark license arrangement to determine whether or not thereis any excessive license fee such that the trademark holder is engaging inactivities for which an ABC license is required, or if there exist indicia of 

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